How enterprise-wide analysis can reduce costs in the wake of reimbursement challenges
Materials managers are confronting tough challenges to deliver cost reductions that are steep and sustained. A reduction figure of 20 percent is not an uncommon request. While supply chain can do its part, it’s a tall order. How can supply chain professionals meet such a request and support an organization’s goals?
Why 20 Percent?
Since 2014 when all reimbursement shifted toward an anticipated Medicare basis, hospital managers have been looking for 20 percent cost reductions to ensure that their facility can maintain financial viability. If your facility is not making money on Medicare patients, reimbursement cuts will potentially disrupt the financial stability of your organization. Studies have shown that Medicare pays a typical facility 80 percent of the costs of acute care incurred. Because Medicare payments are not anticipated to rise sharply, care costs need to be reduced in order to make money at this level.
Examining Medicare Profitability
Examine your own facility’s Medicare cost report to assess how you’ve been performing. (There are numerous services that provide this data for a relatively nominal fee, and your facility’s finance department likely already uses one.) Using Medicare cost data to benchmark your organization is a reasonable idea, because virtually all hospitals must file these reports, and they’re in a uniform layout. The enterprising manager should look at numerous indicators of cost and revenue to determine the course of action, while balancing the facility’s clinical performance, operational efficiency and financial stability. The data will show you a snapshot representation of your operations, as well as that of your hospital competitors. Here’s what you should look for in these cost reports:
1. Revenue cycle representation. There should be a diversity between Medicare, Medicaid and “other” payment sources. A normal facility should have 35-45 percent Medicare revenues, 10-15 percent Medicaid revenues and the rest from the local basket of private payment contracts. If there’s a departure from the roughly 50/50 split between government payment and private payment, the facility is more susceptible to reimbursement shocks from either side.
2. Medicare case profitability. Measure this by calculating the average cost of a Medicare case versus the average reimbursement. We want to see that the facility is not losing much, if any, money on Medicare patients. If costs are low enough to make money on Medicare, the facility is doing a pair of important things. First, the facility is maximizing its charge capture to reflect severity (usually reflected in the Case Mix Index), and second, cost controls have restrained utilization in this difficult patient category. If such a hospital is making money on Medicare, it’s in a good position to maintain course.
However, in most cases a facility is losing money on Medicare—sometimes on a substantial scale. This is an indication that charging needs help, and that utilization needs review and control. Fortunately, consultants like those with SourceTrust can assist the facility with both situations.
Medicare unprofitability is a sentinel indicator of the need to enact “cost-shifting.” This is where higher profitability in one payor category offsets lower profitability in another, such as private payor cases generating enough profit to offset losses in Medicare and Medicaid.
3. Patient flow. To determine patient flow, we examine the average length of stay trend across payor categories. We look for a downward trend (such as shortening of stay) in Medicare, Medicaid and “other” payment. This downward trend indicates that patient flow is not only being monitored, but it’s also improving. If there’s a lengthening of stay in one category versus another, we can interpret that a foundational service process—such as laboratory, radiology, E.D., O.R., I.C.U. bed management or another area that touches a majority of patients—needs attention.
How Supply Chain Management Fits
It’s sometimes difficult to make the leap from enterprise performance to a foundational department (like supply chain) work listing without quickly being re-focused on one of the perennial work areas; e.g. standardization, physician preference management, indirect spend management or purchased services. These areas will always remain the core of supply chain management, but if quick wins are needed, doing some enterprise cost analysis using a third party source like Medicare data can help.
If an enterprise-wide analysis algorithm (like the one briefly described above) is followed, managers may find that the team can step into the operating room or a similar area with renewed purpose. For example, if Medicare cases are unprofitable, the way supplies match physician preference in this case category may be more readily changed than making a wholesale standardization initiative stick. Likewise, asking department managers to describe how a request is matched to reducing costs in key patient populations can re-focus the discussion on a new pathway. If department requests can continuously consider the revenue cycle of the facility, and how foundational care delivery costs can be addressed, some unique solutions usually become available.
The Path Forward
It remains a difficult challenge. Reducing 20 percent of operating costs requires the facility to address all aspects of the cost equation including capital, labor, supply and services. Consequently, supply chain managers must continue to think holistically in their search for cost drivers and cost-reducing alternatives.
Share Email Medicare
